Import leakages in stimulus plan exaggerated

Feb. 17, 2008 10:16pm


One of the commonly repeated refrains about the stimulus package signed by President Bush is that a lot of stimulus will be lost on the purchase of imported goods. But this argument does not stand up to careful scrutiny. According to the latest data from the US Bureau of Statistics for the year 2007 imports of goods and services amounted to a total of 1.965 trillion dollars or about 15 % of the American GDP.
Consumption expenditures in 2007 amounted to just under 70 % of the GDP. A marginal propensity to consume of .7 seems realistic in light of the proportion of the GDP accounted for by personal consumption expenditures.

Therefore for every dollar of the stimulus package received we can expect 70 cents of it spent on consumption . We can also expect there will   be a total of about 15 cents of every dollar expended,on average, spent on imported goods and services .

Now the norm in industry is that about half of of the price of goods is remitted to the wholesaler and manufacturer of goods with the other half   retained at the retail end and used to pay wages, salaries , rents, profts and overhead costs at the point of sale. In this case the point of sale is in the US. so as a rough guide we can assume that there will be a leakage of about 7.5 cents out of every dollar spent which will be remitted to the non American supplier of the good or service. This means however that in the first round of spending 62.5 cents out of every dollar received as a rebate will be disbursed in the US,on the consumption of goods and services assuming a marginal propensity to consume of .7 .

Those who receive it as second round recipients will also spend a lot of it , if we assume a marginal propensity to consume of .7 then .7 x 62.5   will be spent in the second round. But we must subtract the 7.5 % of the second round spendings that will leak out to the non US suppliers of imported goods.This means a total of .7 x 62.5=43.75- 7.5% of 43.75=40.35cents out of every dollar received will be spent in the US in the second round. In the third round the same logic applies. 70 % of the 40.35 cents received will be spent minus the 7.5 % deduction for foreign leakages or a total of 26.12 cents per dollar of initial stimulus. If we add up the totals from the first three rounds we get a total stimulus in three rounds of $ 1.29 per initial dollar of increased stimulus.If there had been no import leakages the total would have been 12.9 cents greater.

For the fourth round we can add an additional .7x 26.12=18.28 - (.075x 18.28=1.37) = 16.90 cents. So the total   accumuated stimulus by the end of the fourth round would be 1.45 times the original .

Over the next several rounds the initial stimulus dwindles done toward zero. But by then it will have done its work.

Now it might be the case that the marginal propensity to consume will be less than .7 because it is argued that some people who receive the rebate cheques will not spend it but use it to reduce consumer debt. In this case the three round multiplier will be less but people's balance sheets and the balance sheets of the lenders will be improved by the amount by which personal debts are reduced.

The impact of this improvement in balance sheets is less certain( for example it might result in renewed efforts to market debt which in current circumstances might be difficult to accomplish) but it will help restore some degree of confidence in the financial sector.
Imports do reduce the initial impact of the stimulus but not by as much as the headlines proclaim.( Also remember so long as the trading partner who provides the imports also buys goods from the US some of this money that leaks out comes back as demands for exports.)

Another potential complication is the tax that is levied on the additional income generated in later rounds by the stimulus. The loss in stimulus however will be lessened to the extent that the government uses the additional revenues simply to try over the medium turn to balance its books at the high employment target level but not to seek to run a surplus until the stimulus has had time to have impact on the reversal of slump psychology and investment behaviour.